We're Keeping An Eye On 17 Education & Technology Group's (NASDAQ:YQ) Cash Burn Rate

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should 17 Education & Technology Group (NASDAQ:YQ) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for 17 Education & Technology Group

When Might 17 Education & Technology Group Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When 17 Education & Technology Group last reported its balance sheet in December 2022, it had zero debt and cash worth CN¥733m. Looking at the last year, the company burnt through CN¥467m. That means it had a cash runway of around 19 months as of December 2022. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is 17 Education & Technology Group Growing?

Happily, 17 Education & Technology Group is travelling in the right direction when it comes to its cash burn, which is down 71% over the last year. But the top line growth tells a different story, with operating revenue falling 76% in that time. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how 17 Education & Technology Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can 17 Education & Technology Group Raise Cash?

While 17 Education & Technology Group seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

17 Education & Technology Group's cash burn of CN¥467m is about 153% of its CN¥306m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

How Risky Is 17 Education & Technology Group's Cash Burn Situation?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought 17 Education & Technology Group's cash burn reduction was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for 17 Education & Technology Group that investors should know when investing in the stock.

Of course 17 Education & Technology Group may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.